Joint-life annuities, guarantees, life cover and death-in-service all protect your family if you die first. Each one has a cost, often paid out of your own retirement income.
Here’s a question most of us put off: if you died next Tuesday, what would your partner actually live on? Not the house, not the sentimental stuff. The money coming in every month.
Every way of protecting the people you leave behind has a price. Sometimes that’s a monthly premium. Sometimes, and this is the part people miss, it’s taken quietly out of your own pension. Paying for protection you don’t need is wasteful. Skipping protection you do need is worse.
It depends on what kind of pension you have, and the State Pension is the one that catches people out. If you reach State Pension age on or after 6 April 2016, you’re on the new State Pension (£230.25 a week in 2026/27). It’s based on your own National Insurance record, and in most cases your spouse can’t inherit it. There are limited exceptions for any “protected payment” built up before 2016, but the core amount dies with you. If your household budget assumes two State Pensions, a widow or widower may suddenly be living on one.
Defined benefit (final salary) schemes usually pay a pension to a surviving spouse or civil partner, often a fraction of yours. Check your scheme booklet or annual statement for the exact figure, and make sure your expression of wish form is up to date. That matters even more if you aren’t married.
Defined contribution pots, the kind most of us now have through work, are more flexible. Whatever is left in the pot can usually go to whoever you nominate. If you die before 75, beneficiaries can generally take it tax-free, within the lump sum and death benefit allowance. Die at 75 or over and they pay income tax on what they withdraw at their own rate, which means Scottish income tax bands apply if they live in Scotland.
Buying an annuity is where the choice gets serious. A basic single-life annuity pays the highest income, but it stops when you die. Your partner gets nothing, even if you’d only collected three payments.
You can change that, and every change costs you. A joint-life annuity carries on paying some or all of your income to your partner after you die. A guarantee period keeps payments going for a set number of years even if you die early. Value protection pays a lump sum to your estate if you die before you’ve had back what you paid in. MoneyHelper sets these options out clearly.
The catch is that each one lowers your starting income, because the insurer is promising to pay out for longer or to more people. A joint-life annuity costs more if your partner is younger than you, since they’re likely to be drawing it for longer. The cut is permanent. You take the lower income every year for the rest of your life, including all the years when you’re very much alive and could do with the money.
Every pound of protection is paid for by someone. Usually that someone is you, aged 72, getting a smaller pension.
Whether that’s worth it depends on one blunt question: would your partner be all right without it? If they have a decent pension of their own and the mortgage is paid off, maybe they would. If they’d be relying on the State Pension alone, the sums look very different.
Sometimes it is, sometimes it isn’t, and it’s worth comparing the two. Term life insurance pays a lump sum if you die within a set period. It’s usually cheapest when you’re younger and healthy, and it gets steadily dearer through your fifties and sixties. Pre-existing health conditions push the price up further.
Before you buy anything, check what you already have. Many employers offer death-in-service cover, commonly a multiple of your salary. It costs you nothing while you’re employed, but it ends when you leave or retire, which is exactly when a lot of people find they’re uncovered. Write down what yours pays and when it stops.
Writing a life policy in trust can keep the payout outside your estate for inheritance tax and get money to your family faster, without waiting for probate. Most insurers will give you the trust forms for free.
This is where the trade-off bites in your fifties. Say you’re a basic-rate taxpayer and you stop paying £100 a month into your pension to fund a life policy. That £100 of pension saving only cost you £80 after tax relief, and your employer may have been matching some of it. Over 15 years, £100 a month is £18,000 going into your pot before any growth. Insurance premiums are paid out of taxed income with no relief at all.
So moving money out of your pension to pay for insurance is an expensive swap, especially if you’d lose employer contributions. In most cases it makes more sense to trim spending somewhere else than to cut a tax-relieved pension. If money really is that tight, an FCA-regulated adviser can help you work out how much cover your family actually needs. The honest answer is often less than an insurance salesman would suggest.
Don’t forget income protection either. In midlife, a long illness can do more damage to your finances than dying. Income protection pays part of your earnings if you can’t work, so you don’t have to stop pension contributions or raid your savings while you’re off sick. Check first whether your employer offers group cover or generous sick pay.
At 48, with a mortgage and teenagers, a big lump sum on your death really matters. At 63, with the house paid for and the children (allegedly) independent, what your partner needs is a reliable income rather than a pile of cash. Cover that was essential ten years ago may now be a premium you can drop. A joint-life annuity you’d have dismissed at 50 may make complete sense at 66.
Inheritance tax is also on the move. Under government plans, from 6 April 2027 most unused pension funds and pension death benefits will count towards your estate for inheritance tax. Death-in-service benefits from registered schemes are due to stay outside it. If you’ve been treating your pension as a tax-free inheritance pot, that plan needs another look.
Before you take your pension, use the free Pension Wise appointment from MoneyHelper. If your situation is complicated, it’s worth paying an FCA-regulated financial adviser.
Protecting your family if you die always has a cost. With a joint-life or guaranteed annuity, that cost is a lower income for the rest of your life. With life insurance, it’s premiums paid from taxed income. The new State Pension mostly can’t be inherited, so work out what your partner would actually live on without you, check what death-in-service and scheme benefits you already have, and only pay for the gap. Go back over it every few years, because your needs change as you get older.
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